October 5, 2006
Nancy M. Morris, Secretary
Proposed NASD Rule 12504-Dispositive Motions
Dear Ms. Morris:
I represent investors in arbitrations before the NASD and have done so since 2003. Prior to that time, I worked in-house for a well-known broker dealer defending against such claims. I am writing to you today to express my view that the proposed rule to permit the filing of motions to dismiss in "extraordinary circumstances" must NOT be enacted.
Importantly, because the proposed rule does not define "extraordinary circumstances", brokerage firms shall be able to cite the proposed rule - if enacted - and file motions to dismiss in as many scenarios as a creative litigator can devise. As a result, the proposed rule, if enacted, shall promote the practice of filing motions to dismiss, rather than limit it. Since it is the Respondent bar that will be filing these motions, the only result will be that investor Claimants will have to defend against such motions, conceivably, every time that they file a claim - regardless of the fact that they have submitted such claim in good faith.
As a further demonstration as to how the proposed rule is grossly one sided, it should be noted that Claimants cannot bring summary award motions even when there are "extraordinary circumstances," such as if the broker has been convicted of a crime, has forged documents, has been expelled from the securities industry, or, the employing broker-dealer has been fined or sanctioned by an SRO for the precise conduct cited in a Statement of Claim. Notably, although the New York State Attorney General endeavored to sanction various firms hundreds of millions of dollars pursuant to the conflict of interest enforcement proceedings (with the stated hope that such sanctions could subsequently enable investors to recoup their losses via the filing of private claims) very few investors were thereafter able to recoup losses caused by these firms' misconduct.
Notably, the adversarial process of arbitration is quite distinct from that of civil litigation in many ways: discovery in arbitration is far more limited; depositions and interrogatories are strongly discouraged in arbitration; Claimants do not have their claims heard before a "jury of ones peers" (whereas at least one of the three arbitrators is a person with direct ties to the brokerage industry); and, the prospect for successful appeal of adverse awards is so slim as to be virtually nonexistent. To pave the road for Respondents to be able to file motions to dismiss in nearly every case will greatly add to the litigation expense of Claimants (who often file these claims because their financial resources have been greatly compromised by Respondents actions and oversights) who will have to essentially defend and prove their claims prior to a full hearing and well before any meaningful discovery has taken place. Importantly, this writer has already encountered Respondents who refuse to respond to any Claimant discovery requests until after Respondents' motions to dismiss have been reviewed by the arbitration panel via a pre-hearing conference, for the sole reason that they, the Respondents, have filed a motion to dismiss. Surely, that practice shall be emboldened if the proposed rule is enacted. I ask you, how can Claimants overcome motions to dismiss if Respondents refuse to provide discovery responses - despite their discovery obligations promulgated in the NASD Discovery Guide - when Respondents file motions to dismiss?
Arbitration is supposed to be - or at least be perceived to be - a fair and equitable forum. By authorizing motions to dismiss by Respondents but not motions for summary award by Claimants, the SEC and the NASD will clearly be perceived as being biased in favor of the brokerage industry.
Accordingly, I urge that the SEC issue a bright line rule PROHIBITING all motions to dismiss (as well as motions for summary award), unless the parties stipulate that a given motion may be heard, or else that the rule provide that both Claimants and Respondents may bring dispositive motions in "extraordinary circumstances," whatever that means.
-Theodore M. Davis, Esq.